An overwhelming majority of North American institutions say they want fuller disclosure in corporate financial statements – and see this as the single most important corporate governance initiative listed companies can undertake. However, nearly one in three US corporations have not adopted more comprehensive disclosure practices and have no plans to do so. These are key findings of a recent Greenwich Associates survey in which more than 100 institutional investors and corporate executives in the United States and Canada were asked about corporate governance concerns.
In another key governance area, guaranteeing the independence of boards of directors, which most institutions say is likewise important, companies are even less responsive, with 77% saying they have neither instituted such a change nor plan to.
“It’s very possible these corporations we spoke to are all solid citizens who have been doing the right thing for years,” Greenwich Associates consultant Jay Bennett says. “But they need to bear in mind the attitude of institutional investors overall is that corporations haven’t been doing enough, and now more than ever for corporations, it is the institutional investor who is determining your stock price. Corporations may need to push the envelope here.”
Of the institutions surveyed, 58% hold over $10 billion in assets, and close to half over $20 billion. Total assets under management represented by survey respondents was well over half a trillion dollars. Among corporations surveyed, two-thirds generate over $1 billion in sales, and one-quarter generate over $5 billion in sales annually.
80% of institutions said it is critical to them that a company discloses important details in the footnotes of their financial statements, and 57% say companies need to have a majority of independent directors on their boards. Further, 47% name independent executive compensation committees, 33% name expensed stock options, and 29% name CEO certification of financial statements as key corporate governance initiatives.
“Yet, when we look at the corporate side, enthusiasm is far more tempered, and in some cases nearly non-existent,” community manager Melissa De Vries notes. “The corporations we polled agree with institutions that there are problems, but don’t agree at all about how to fix them.”
Both corporations and institutions do agree companies are adopting more conservative accounting practices that will meaningfully impact reported earnings, and that the emphasis on corporate governance will be sustained beyond the next 12-24 months. [More specifically, nearly half of the corporations and 55% of institutions agree that companies are adopting more conservative practices.] Both see a positive overall impact on the market from an increased emphasis on corporate governance, though institutions are less positive than corporations. [69% of corporations and 52% of institutions predict a long-term positive impact, despite the short-term volatility.]
“Corporate executives tell us that this is an issue of restoring trust, and that corporate governance reforms will have the desired effect,” Melissa De Vries notes.
Two-thirds of corporations, and close to half of institutions, disagreed that sell-side analysts have been unfairly made the scapegoats for investors’ losses, suggesting that they blame analysts at least in part for troubles in the North American markets. Conversely, 35% of institutions and 15% of corporations felt that analysts have been blamed unfairly.
“The [sell-side] analyst as a rock star was a phenomenon of the last four or five years that we haven’t seen before, and I’m sure the corporations had a visceral reaction to that,” Jay Bennett notes. “The analysts certainly had a lot of throw weight, and they were very visible. It doesn’t mean they were all right or all wrong.”
In this context, only 23% of institutions say they are less likely to use sell-side research, though 71% say they are increasing their reliance on in-house research and 48% say they are more likely to use an independent broker or research house.
“Just 23% say they expect to hire additional analysts in the next 12-24 months, but those include some of the largest institutions we interviewed,” Melissa De Vries comments. “They may be a minority, true, but too well-off to ignore.”
Greenwich Associates conducted online surveys with 62 senior finance executives at corporations and 49 equity investment professionals at buy-side institutions in the United States and Canada. Respondents were asked about their views on the impact of corporate governance and how proposed reforms will affect their organizational structure, investment decisions, and the financial markets. Surveys were conducted from September 24, 2002 through October 7, 2002.